The stagflation concerns from the August payroll report in the US were confirmed by another labour market report (JOLTS), which showed unfilled job openings soaring to another all-time high in July.
Yields continued to march higher worldwide, risk assets wobbled, and major currencies stayed within 1% of each other for the most part. The US dollar outperformed all of its G10 peers and most EM currencies. The ECB announced a cut in its monthly PEPP bond purchases, but President Lagarde insisted it was not a taper but ‘recalibration’, while euro traders shrugged off the event for the most part.
Johnson’s plan to pay for additional social care through an increase in taxes had a muted impact on sterling, though the idea that social expenditure should be matched by taxation certainly goes against the recent grain in international macroeconomic policy. Labour data on Tuesday will be closely watched, but we think the inflation data on Wednesday will be more important for the outcome of the Bank of England meeting the following week. The MPC was already evenly split on whether conditions for a hike had been met. Wednesday expected inflation surge may solidify a hawkish majority there, which should be positive for the pound.
The outcome of the September ECB meeting was in line with market expectations. A cut of unspecified size was announced to the monthly PEPP purchases of Eurozone sovereign bonds. However, President Lagarde somewhat bizarrely went out of her way to assure markets that this taper was not, in fact, a taper. Less noticed were the ECB inflation projections, which foresee a return to below target 1.5% inflation in 2023. This could be interpreted as a dovish signal and therefore negative for the euro, but the dismal track record of ECB inflation projections argues against taking it too seriously.
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